Leonteq (XSWX:LEON, Financial) is a Swiss financial company that packages structured investment products for the institutional investment community. The stock is down because of the low volatility in financial markets. It should do well if volatility picks back up.
The company has 15.9 million shares, the stock trades for 43.5 Swiss francs ($43.18), and the market cap is 691 million francs. The dividend has been cut. Morningstar lists the earnings per share as 1.08 francs so the stock would trade at a price-earnings (P/E) ratio of 40.3.
Income for 2016 was 207 million francs, down from 219.7 million francs in 2015. Operating expenses were 189.4 million francs, up from 150.5 million in 2015. Declining revenues and increasing expenses aren’t a great mix. Net profit was 17.2 million francs in 2016 versus 68.6 million francs in 2015.
What the company calls platform assets were at 9.2 billion francs in 2016 compared to 7.9 billion francs at the end of 2015. Leonteq’s capital was 385.3 million francs in 2016 versus 388.2 million francs in 2015. The BIS total capital ratio was 22.7% as of Dec. 31, 2016. This is tier-one capital ratio.
Leonteq makes structured products. Unlike in America where it’s easy to buy and sell options, it is more difficult in Europe and Asia. Leonteq puts together these products and sells them to institutional investors. An example is the page of reverse-convertibles. These products are written against an underlying basket of stocks.
Leonteq has grown since 2012 when it produced 128.85 million francs in revenues. Of course the shares outstanding were only 10.68 million so the share count has increased by about 50% since then. The stock price was over 200 francs in 2015. It’s gotten pummeled since then. Earnings per share were 4.36 francs back in 2014. Imagine if the stock could duplicate those earnings? The stock price would rocket.
To save in expenses, office space is being given up, there is a hiring freeze on, and 50 employees were let go. Management made the mistake of putting on expenses while revenues were dropping in 2016. Swiss hedge fund manager Rainer-Marc Frey owns at least 7.5% of the outstanding shares. He was buying when the stock was in the mid-20s so he’s made a nice profit.
It could be an interesting time to buy the stock. The stock price has bounced off its bottom. Like many things, you buy when the cycle is unfavorable and sell when it’s favorable. Because there is low volatility, there is less demand for these structured products. One of these days, something will break loose in Europe.
The tough thing about Leonteq is understanding the risks. There are European banks that are counterparties on some of these derivatives. What if they go broke? Leonteq isn’t quite like a brokerage firm. These products are difficult to understand.
Part of the reason that I wrote this article is that as far as I can tell, no one has written about the company in the U.S. It’s certainly an interesting stock to follow for the GuruFocus viewer. The stock does not trade in the U.S. so you will have to have your broker buy in Switzerland.
Disclosure: We do not own shares.
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